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Good cash flow is the lifeblood of every business yet many owners feel uncomfortable about chasing the money they’re owed.

NAB Business View

Cash flow can make or break a small business yet the task of managing cash flow often slips to the bottom of the pile. The owners of small and medium businesses are notoriously busy and pursuing debt – one of the key tasks of efficient cash flow management – is a job that many actively dislike.

Often people worry that chasing the money they’re owed will jeopardise their relationships with their customers. “This can make them overly cautious,” says Roger Mendelson, Chief Executive Officer of Prushka Fast Debt Recovery. “In general, customers respect a business that behaves in a professional way.”

The right person for the job

Mendelson strongly recommends making one person responsible for the task of managing credit. “This shouldn’t be foisted on anyone. The person you choose should really want the job,” he says. “It needs to be someone who enjoys the challenge of winning people over, is good on the phone, communicates well and can be friendly but firm. And it should never be the principal of the business as it’s easy for them to get too personally involved.”

Credit managers need time to do the job properly, appropriate power and also the right tools for them to monitor progress. “This doesn’t have to a complex process,” says Mendelson. “One of the easiest is to have a system for tracking the outstanding debts each month as a percentage of the total over 30, 60 and 90 days and the aim, of course, is to reduce the figure for anything over 90 days.”

Fast follow-up

The follow-up process should begin with a phone call the day after the account falls due. “If there’s a problem you really need to know about it at this stage so that you can take steps to resolve a genuine issue,” says Mendelson. “Or, in the worst case scenario, you’ve found out that that they either haven’t got the money or just don’t want to pay.”

If a customer can’t afford to pay the full amount or wants to defer payment, negotiate a deal. “This must be confirmed in writing and it needs to include defined dates and amounts, not just “I’ll pay a bit when I can”, says Mendelson.

He recommends that no one receives more than two statements. “Each step you take needs to be harsher than the one preceding and your customers need to understand that you’ll take action if the debt is in default,” he continues. “Your trading terms should include a provision that, if the matter does get referred to a collection agency or law firm, the full cost of collection will be added to the debt.”

There may come a point where outsourcing is the most sensible option. “You lose credibility if a debt stays in-house for too long and a professional is also more likely to get results without going to court,” says Mendelson.

“But, for most SMEs, having the appropriate policies and procedures in place will be all it takes to maintain both good cash flow and good relationships with their customers.”

Read some simple steps to take when offering credit to your customers

Sticking to the rules

You may be ready to start enthusiastically chasing your debts but you have to make sure you don’t fall foul of the regulators. Australia has very strict debt collection standards created by the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) to protect both businesses and individuals. Businesses of all sizes need to be aware of the guidelines to make sure they don’t end up open to charges of harassment.

The guidelines, which can be viewed on the ACCC and ASIC websites, cover:

How you can pursue a debt

Rules for contacting debtors

Consumer protection laws to be aware of, especially around harassment and misrepresentation

Privacy obligations

Record keeping

The guidelines are very detailed around contacting someone who owes you a debt, including:

Providing the debtor with information about their account

Requesting payment

Outlining any consequences of non-payment including legal options and the restriction of services

Offering debt repayment arrangements

Creating settlement or an alternative payment option

Reviewing existing arrangements and understanding why they haven’t worked

Checking if a debtor has changed address

Most importantly, businesses chasing a debt cannot use embarrassment, intimidation or demoralisation.

This article was first published in NAB Business View.